By  on May 11, 2007

PARIS — Reflecting an unfavorable currency environment and a sluggish Japan, first-quarter sales at Hermès International rose a weaker than expected 1.3 percent, to 366.1 million euros, or $479.7 million, from 361.5 million euros, or $434.7 million. Stripping out the impact of currency, the increase stood at 6.5 percent.

Business remained robust for the French luxury firm in most regions; sales at constant exchange were up 10.8 percent in Asia-Pacific, 9.8 percent in Europe and 9.2 percent in the Americas.

But a weak yen and feeble demand in Japan led to an 11 percent drop in reported sales there, to 89.7 million euros, or $117.5 million, from 100.8 million euros, or $121.2 million. At constant exchange, Japanese sales dipped 1.2 percent.

"Our business is booming all over the world, except with the Japanese," Patrick Thomas, chief executive officer at Hermès International, said in an interview. "Their purchasing power has declined significantly."

To account for the weak yen, Hermès recently increased prices 8 percent in Japan, where luxury goods prices have soared more than 40 percent in recent years. Thomas noted that duty free sales to Japanese consumers in places like Korea and Singapore are also affected.

"We are not too worried," he noted. "It's better than most of our competitors in Japan. And we are expecting in the last three quarters of the year [to see] a better trend than the first."

Overall, currency gyrations shaved approximately 20 million from first-quarter revenues.

"In 2006, Hermès registered the slowest earnings growth of our universe, and 2007 should not be much different," Antoine Belge, luxury analyst at HSBC in Paris, wrote in a research note.

The results, while shy of consensus expectations, did not prompt Thomas to change Hermès' target of an annual sales gain of 8 percent to 10 percent at constant exchange rates.

He said sales for the balance of the year would be boosted by store openings, including a Wall Street flagship and four units in China, along with such product introductions as a new women's fragrance, Kelly Calèche.

Retail sales, which represent roughly three-quarters of revenues, were strong at constant currency: up 8 percent in France, 16 percent in the rest of Europe, 22.5 percent in Asia-Pacific and 11 percent in the Americas.Retail sales in Japan slipped 0.5 percent.

Thomas declined to pinpoint April sales, but noted, "The trend is good."

By product category, tableware and perfumes logged the biggest gains, as constant-currency sales rose 30 percent and 15.4 percent, respectively. Sales rose 8.1 percent for silk and textiles; 7.7 percent for watches, and 6.8 percent for ready-to-wear and fashion accessories.

Sales of high-margin leather goods dipped 3.4 percent, to 152.1 million euros, or $199.3 million, representing a 2.5 percent increase at constant exchange.

Thomas cited particular strength in jewelry, belts and men's rtw. "And silk is going very well. That's a very interesting trend," he added, crediting creative designs for the gains.

Belge said he expected European luxury firms to become more vocal about the negative impact of any further weakening of the dollar and yen against the euro. "The much less favorable [foreign exchange] environment should exacerbate the inevitable slowdown from the exceptional years of 2005 and 2006," he wrote.

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